Turkey Crisis: Lira hit again, risk aversion hits eurozone bonds
A dispute between NATO allies Turkey and the United States which reached new intensity over the detention of an American pastor has hammered the lira.
Borrowing rates for southern eurozone nations pushed higher Monday as the crisis in Turkey dampened appetite for risk among investors who were also keeping a wary eye on Italy.
The crash in the value of the lira has reverberated far beyond Turkey as investors have fled other emerging market currencies in favour of safer assets, while the shares of European banks with units in Turkey have taken a lashing.
The aversion to risk has also begun to be felt in the borrowing costs of southern eurozone nations, in particular Italy where a populist governing coalition is preparing its first budget.
Deputy Prime Minister Luigi Di Maio, in an interview with the Corriere della Sera daily, called on Europe to allow the country to pursue reforms that would boost the economy and reduce debt.
He said that in any case after European elections next year "we will be finished with the austerity era and we'll begin a seven-year period of rising budgets."
At 1210 GMT the rate of return for investors on 10-year Italian government bonds in trading in the secondary markets rose to 3.082 percent from 2.993 percent on Friday.
The yield on 10-year Spanish bonds climbed to 1.505 percent from 1.407 percent, while those on Portugal's 10-year bonds rose to 1.864 percent from 1.778 percent.
Meanwhile, the yield on 10-year German government bonds, which are the benchmark in the eurozone and are safe-haven asset, dropped to 0.308 percent from 0.317 percent.
The yield on similar maturity French bonds climbed to 0.684 percent from 0.670 percent.
Turkey's central bank on Monday sought to calm markets rattled by the precipitous plunge of the Turkish lira as a defiant President Recep Tayyip Erdogan chastised the US for seeking to stab Ankara "in the back."
A dispute between NATO allies Turkey and the United States - which reached new intensity over the detention of an American pastor - has hammered the lira and also raised questions over the future partnership between Washington and Ankara.
As the latest developments caused the lira to plunge further in value, investors fretted over potential economic contagion from Turkey, particularly to European banks.
The already embattled Turkish lira tumbled some 16 percent against the dollar on Friday as US President Donald Trump said he had doubled tariffs on steel and aluminium from Turkey.
"We are together in NATO and then you seek to stab your strategic partner in the back. Can such a thing be accepted?" Erdogan said at a conference in the capital Ankara.
After Erdogan's speech, the lira was trading back at 6.9 to the dollar, a loss of seven percent on the day, recovering from even sharper losses in earlier Asian trade where it struck a record low of 7.2362 to the greenback.
In its first statement since what was dubbed "Black Friday" in Turkey, the central bank said it was ready to take "all necessary measures" to ensure financial stability, promising to provide banks with "all the liquidity" they need.
The bank also revised reserve requirement ratios for banks, in a move also aimed at staving off any liquidity issues.
But to the dismay of markets, the statement gave no clear promise of rate hikes, which is what most economists and analysts say is needed to ease the crisis.
- 'Economic siege' -
Erdogan indicated he was in no mood to offer concessions to the United States in one of the worst spats between the two NATO allies in years.
Erdogan said Turkey was facing an "economic siege", slamming the currency movements as an "attack against our country."
The Turkish leader has been sanguine over the punitive measures announced by the US, saying that while Turkey's relationship with Washington is at stake it will look for other partners.
Analysts say that while Washington's sanctions against Ankara sparked the immediate crisis, Turkey's economy has been risking trouble for a while due to high inflation and the weak lira.
The central bank has over the last few weeks defied calls from markets for rate hikes to combat these problems, raising fears of interference from Erdogan who has repeatedly called for low interest rates.
Erdogan had on Saturday described interest rates as a "tool of exploitation", in remarks unlikely to impress the markets.
"Investors need to see serious economic measures and not political ones to prevent things getting completely out of control," said Hussein Sayed, chief market strategist at FXTM, saying this had to include an emergency rate hike.
But Erdogan advised Turks not to worry.
"It is not at all like we sank and we are finished. The dynamics of the Turkish economy are solid, strong and sound and will continue to be so."
Erdogan also blasted what he called "economic terror" on social media, vowing that the judiciary had taken necessary measures to punish so-called speculators.
The Interior Ministry launched an investigation into 346 social media accounts on grounds of "provocative sharings", the state-run Anadolu news agency reported.
- 'Unlikely to happen'-
American pastor Andrew Brunson has been held since October 2016 on terror and espionage charges and, if convicted, could face a jail term of 35 years. Trump has described his detention as a "total disgrace" and urged Erdogan to free him immediately.
A delegation led by Turkish Deputy Foreign Minister Sedat Onal failed to secure a deal last Wednesday in talks in Washington on a number of issues including Brunson.
Erdogan on Sunday confirmed media reports that Washington gave Onal's delegation a deadline of 6:00 pm last Wednesday for the release of Brunson "otherwise the sanctions will begin".
Agathe Demarais, lead Turkey analyst at the Economist Intelligence Unit, told AFP that "with an overheated and indebted economy, Turkey will require credibly orthodox economic policies, fiscal discipline and central bank independence to reverse the current situation."
"A normalisation of relations with the US could also reduce the amount of legwork that the central bank will have to do to control the economic situation, but this is unlikely to happen at the moment," she said.
© Agence France-Presse